How To Invest in US ETFs as an American Living in Europe?

Since 2018, American investors living in Europe are no longer able to buy US ETFs (VOO, VTI, etc).  Long story short… it’s an EU regulation.

In response, a common strategy called “direct indexing” can be implemented by which the investor recreates the ETF/index in a separate account using the same underlying companies at the same underlying weights.  You are in effect creating your own personal ETF made of the same pieces as the original ETF.

While this used to be a tool used primarily by the wealthy, in 2021, US expat investors can implement direct indexing on any portfolio without any account minimums or complicated hoops.

There are two key ingredients:

  1. A broker that: supports API access, fractional shares, zero or low trading fees

  2. A direct indexing software program that will calculate and enter the trades for you

The broker:

Alpaca Markets is a relatively new broker to the market and was expressly designed to interact with software.  As with any broker… look for its FINRA designation and SIPC insurance.

The other two brokers to keep an eye on are TD Ameritrade (has an API, but looks like no fractional shares suppoer) and Interactive Brokers (has an API, supports fractional, but only on “pro accounts”).  I happen to be using Alpaca today.

All three of these brokers support what’s called “paper trading”.  Which is basically running your program on “fake money”.  Worth trying out on a “paper account” if you’re interested to see how the mechanics of direct indexing work before turning it on.

Direct indexing software:

Nobody wants to calculate and enter hundreds of trades into a broker, so you’ll use a software service instead.  Pebble Finance is a company that developed a service that implements direct indexing on top of your existing broker (Alpaca, TD, etc).  Pebble will allow you to model an index and implement it on either a paper portfolio (see above) or real portfolio.  

That’s it!

Things to be aware of!

When you own an ETF, you are hidden from the underlying companies.  When you direct index you actually own those distinct companies!  That means as the direct shareholder you will get the opportunity to vote your shares, etc.  Every company is required to send out voting material to their shareholders and that happens a few times per year per company.  This will come to you via your broker (and usually over email).  So be prepared to set up some email rules so you can keep your inbox clean.

You will see a flurry of trading activity (lots of little buy orders) to initially create the index.  After that it will go quiet for months.  This is expected.  The value of the index floats up and down based on each of the share prices.  There are only 4 times per year when the index companies can possibly change so there are only 4 times a year that the software would rebalance (unless you opt not to).


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